A bond is a financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government. It is essentially an IOU from the borrower to the lender. Here’s how it works:
A bond is a type of debt security that represents a loan made by an investor to a borrower, typically a corporation, municipality, or government. It is essentially an IOU. When an investor buys a bond, they are lending money to the bond issuer for a defined period at a fixed interest rate. In return, the issuer promises to:
A corporation or government needs to raise money for various purposes such as funding new projects, operations, or refinancing existing debts. They issue bonds to investors. The details of the bond, including the interest rate (coupon rate), maturity date, and face value, are specified.
Investors buy these bonds, effectively lending money to the issuer. The price of the bond can fluctuate in the market, but the face value is what will be repaid at maturity.
The issuer pays periodic interest payments to the bondholders, typically semi-annually or annually. These payments are based on the coupon rate. For example, if an investor buys a bond with a face value of $1,000 and a coupon rate of 5%, they will receive $50 annually until the bond matures.
When the bond reaches its maturity date, the issuer repays the bond’s face value to the bondholder. For example, if the bond's face value is $1,000, the issuer will pay $1,000 to the investor at maturity.
Suppose a corporation issues a 10-year bond with a face value of $1,000 and a coupon rate of 5%. An investor buys the bond. Each year, the corporation will pay the investor $50 in interest. At the end of 10 years, the corporation will repay the investor the $1,000 principal.
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